Saturday, November 12, 2005

Joseph E. Stiglitz is a Nobel laureate in economics, a Professor of Economics
at Columbia University, and he was Chairman of the Council of Economic Advisers for President Clinton and Chief Economist and Senior Vice President at the World
Bank. He has some harsh words for Alan Greenspan, particularly his role in
promoting tax cuts, and he wonders if central bank independence is an illusion:

Is central bank independence all it’s cracked up to be?, by Joseph Stiglitz,
Daily Times, Pakistan: Alan Greenspan attained an almost iconic
status as Governor of the Federal Reserve Board. ... Few central bank
governors have the kind of hagiography lavished upon them, especially in their
lifetime... But what makes for a great central bank governor ... great
institutions or great individuals? ...[T]here is little doubt that those
“managing” the economy receive more credit than they deserve, if sometimes
less blame. ... So ... while no central bank governor can ensure economic
prosperity, mismanagement can cause enormous harm. Many of America’s post-World
War II recessions were caused by the Fed hiking interest rates too fast and too
far. There is little doubt that Greenspan had great moments... These successes ... reinforced Greenspan’s exalted status. But they also
led many to forget less successful moments. ...

[T]he real problem for Greenspan’s legacy concerns what happened to the American
economy in the last five years, for which he bears heavy responsibility.
Greenspan supported the tax cuts of 2001 with the most specious of arguments –
that unless something was done ... the national debt would be totally paid off
within, say, ten to fifteen years. According to Greenspan, immediate action
needed to be taken to avert this looming disaster, which would impede the Fed’s
ability to conduct monetary policy! It says a great deal about the gullibility
of financial markets that they took this argument seriously. More accurately,
tax cuts were what Wall Street wanted, and financial professionals were willing
to accept any argument that served that purpose... Greenspan’s irresponsible
support of that tax cut was critical to its passage. ...

But soaring deficits did not return the economy to full employment, so the
Fed did what it had to do – cut interest rates. Lower interest rates worked,
but not so much because they boosted investment, but because they led
households to refinance their mortgages, and fueled a bubble in housing... [A]s
Greenspan departs, he leaves behind an American economy burdened with high
household and government debt and fragile balance sheets – a legacy that is
already contributing to global financial instability. It is still not clear
what led Greenspan to support the tax cut. Was it a massive economic
misjudgment, or was he currying favor with the Bush administration? The most
likely explanation is a combination of the two, for he and Bush were pursuing
the same “starve the beast” political strategy...

The traditional argument for an independent central bank is that
politicians can’t be trusted to conduct monetary and macroeconomic policy.
Neither, evidently, can central bank governors, at least when they opine in
areas outside their immediate responsibility. Greenspan was as enthusiastic
for a policy that led to soaring deficits as any politician ... engendering
support from some who otherwise would have questioned its economic wisdom.
This, then, is Greenspan’s second legacy: growing doubt about central bank
independence. Macroeconomic policy can never be devoid of politics: it
involves fundamental trade-offs ... Unemployment harms workers, while the
lower interest rates needed to generate more jobs may lead to higher
inflation, which especially harms those with nominal assets whose value is
eroded. Such fundamental issues cannot be relegated to technocrats,
particularly when those technocrats place the interests of one segment of
society above others. Indeed, Greenspan’s political stances were so thinly
disguised as professional wisdom that his tenure exposed the dubiousness of
the very notion of an independent central bank and a non-partisan central
banker. Unfortunately, many countries have committed themselves to precisely
this illusion, and it may be a long time before they take heed of Greenspan’s
most important lesson. Stressing the new Fed chief’s “professionalism” may
only delay the moment when this lesson is learned again.

I share these views, but my own take is more tempered. The chair is designed
to bring political influence to the FOMC, the four year appointment and the
ability to be reappointed make political considerations important.
But on the FOMC, the chair has become a dominant voice leading to
questions about how well other interests are represented in the deliberations
and outcome of monetary policy decisions. To me, that is where the problem
begins. To the extent that FOMC decisions will be driven less by the wishes of a
single person under Bernanke, that will be a welcome change.

Last May 2004, we detailed the research of Kenneth H. Thomas (Wharton Finance Lecturer), titled Fed Chief's Calendar Includes More White House Face Time. Thomas' analysis was somewhat critical about the decreasing independence of the Fed, as its Chair ... [Read More]

Mr. Dooley told us that the Supreme Court watches the election returns. So also must the Chair of the Federal Reserve. [Read More]

Tracked on Sunday, November 13, 2005 at 11:54 AM

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Joseph Stiglitz Questions Greenspan's Record and the Independence of the Fed

Joseph E. Stiglitz is a Nobel laureate in economics, a Professor of Economics
at Columbia University, and he was Chairman of the Council of Economic Advisers for President Clinton and Chief Economist and Senior Vice President at the World
Bank. He has some harsh words for Alan Greenspan, particularly his role in
promoting tax cuts, and he wonders if central bank independence is an illusion:

Is central bank independence all it’s cracked up to be?, by Joseph Stiglitz,
Daily Times, Pakistan: Alan Greenspan attained an almost iconic
status as Governor of the Federal Reserve Board. ... Few central bank
governors have the kind of hagiography lavished upon them, especially in their
lifetime... But what makes for a great central bank governor ... great
institutions or great individuals? ...[T]here is little doubt that those
“managing” the economy receive more credit than they deserve, if sometimes
less blame. ... So ... while no central bank governor can ensure economic
prosperity, mismanagement can cause enormous harm. Many of America’s post-World
War II recessions were caused by the Fed hiking interest rates too fast and too
far. There is little doubt that Greenspan had great moments... These successes ... reinforced Greenspan’s exalted status. But they also
led many to forget less successful moments. ...

[T]he real problem for Greenspan’s legacy concerns what happened to the American
economy in the last five years, for which he bears heavy responsibility.
Greenspan supported the tax cuts of 2001 with the most specious of arguments –
that unless something was done ... the national debt would be totally paid off
within, say, ten to fifteen years. According to Greenspan, immediate action
needed to be taken to avert this looming disaster, which would impede the Fed’s
ability to conduct monetary policy! It says a great deal about the gullibility
of financial markets that they took this argument seriously. More accurately,
tax cuts were what Wall Street wanted, and financial professionals were willing
to accept any argument that served that purpose... Greenspan’s irresponsible
support of that tax cut was critical to its passage. ...

But soaring deficits did not return the economy to full employment, so the
Fed did what it had to do – cut interest rates. Lower interest rates worked,
but not so much because they boosted investment, but because they led
households to refinance their mortgages, and fueled a bubble in housing... [A]s
Greenspan departs, he leaves behind an American economy burdened with high
household and government debt and fragile balance sheets – a legacy that is
already contributing to global financial instability. It is still not clear
what led Greenspan to support the tax cut. Was it a massive economic
misjudgment, or was he currying favor with the Bush administration? The most
likely explanation is a combination of the two, for he and Bush were pursuing
the same “starve the beast” political strategy...

The traditional argument for an independent central bank is that
politicians can’t be trusted to conduct monetary and macroeconomic policy.
Neither, evidently, can central bank governors, at least when they opine in
areas outside their immediate responsibility. Greenspan was as enthusiastic
for a policy that led to soaring deficits as any politician ... engendering
support from some who otherwise would have questioned its economic wisdom.
This, then, is Greenspan’s second legacy: growing doubt about central bank
independence. Macroeconomic policy can never be devoid of politics: it
involves fundamental trade-offs ... Unemployment harms workers, while the
lower interest rates needed to generate more jobs may lead to higher
inflation, which especially harms those with nominal assets whose value is
eroded. Such fundamental issues cannot be relegated to technocrats,
particularly when those technocrats place the interests of one segment of
society above others. Indeed, Greenspan’s political stances were so thinly
disguised as professional wisdom that his tenure exposed the dubiousness of
the very notion of an independent central bank and a non-partisan central
banker. Unfortunately, many countries have committed themselves to precisely
this illusion, and it may be a long time before they take heed of Greenspan’s
most important lesson. Stressing the new Fed chief’s “professionalism” may
only delay the moment when this lesson is learned again.

I share these views, but my own take is more tempered. The chair is designed
to bring political influence to the FOMC, the four year appointment and the
ability to be reappointed make political considerations important.
But on the FOMC, the chair has become a dominant voice leading to
questions about how well other interests are represented in the deliberations
and outcome of monetary policy decisions. To me, that is where the problem
begins. To the extent that FOMC decisions will be driven less by the wishes of a
single person under Bernanke, that will be a welcome change.